Nov 15 2017 | Industry View

Cementing Growth

Infrastructure development in India is gaining traction fast as the Government is making an all out effort in trying to remove hurdles and facilitating investments in robust and sustainable infrastructure projects. The focus is on building 100 Smart Cities, high speed rail corridors, dedicated freight corridor, industrial manufacturing zones, urban rapid transit systems, water and waste water plants all across the country. This increased spending on infrastructure projects is most likely to present a huge opportunity for the cement industry in India. Sandeep Sharma takes a look at the cement sector in India...

Industry Background
Indian Cement industry is the second largest producer in the world after China. The Industry recorded an exponential growth with the introduction of partial decontrol in 1982 culminating in total decontrol in 1989. According to Indian Brand Equity Foundation (IBEF), 210 large cement plants account for a cumulative installed capacity of over 350 million tonne, while over 350 mini cement plants have an estimated production capacity of nearly 11.10 million tonne, as of 2016. As per Cement Manufacturers’ Association (CMA), the industry has around 65 companies having around 200 cement plants. The industry is producing world class cement and the produce can conform to any of the International standards viz. BS, ASTM, DIN etc. Industry is extremely conscious of quality, environmental health and safety. Most of the cement plants have received ISO 9000 series of accreditation, ISO 14001 and OHSAS-18001 certification. The shortage of coal is a chronic problem for the cement manufacturers. According to industry sources, the Indian cement industry is expected to grow at 6-7 per cent in FY2017-18, owing to increased spending on Infrastructure development by the Government including construction of cement concrete roads.

Facts & Figures
As per Index of Eight Core Industries released by Government of India for the month of April 2017, the Cement production has declined by 3.7 % in April, 2017 over April, 2016. Its cumulative index declined by 1.2% during April to March, 2016-17 over the corresponding period of previous year.

Production and Consumption
According to IBEF, the cement production capacity in India is likely to touch 550 million tonne by 2025. The Cement consumption is yet to pick up compared to the developed and other developing economies of the world. The housing sector accounts for around 67 per cent of total cement consumption in India. The other sectors contributing to the consumption includes infrastructure at 13 per cent, commercial construction at 11 per cent and industrial construction at 9 per cent. The demand for cement in the last financial year was at 7 percent. According to CARE ratings, the Government spending on infrastructure comprising roads, ports, railways and other segments is likely to drive the demand for cement in FY2018 to the tune of 3-4.5% during the year, translating to 285-290 million tonne of cement. Low cost housing was the primary demand driver for Cement sector in the last fiscal. As the government plan, ‘Housing for All’ gains momentum, the low cost housing may turn out to be the main demand driver for Cement companies in India.

Industry Contribution and Expectations 
According to CMA, approx 5 lakh people are employed directly and indirectly in the Cement sector. The cement sector contributes approximately Rs.32500-35000 crore annually to the national exchequer through various taxes and levies. Cement manufacturers demand reduction in high levies and duties, easing of transportation costs, availability of essential inputs like fuel and power at low cost.

Addressing Environmental Concerns
To keep the pollution levels at the lowest, the cement industry is using advanced and environment friendly technologies. Setting up of Waste Heat Recovery System for cogeneration of power in cement plants is gaining adoption. Around 30 Mn.t of Fly Ash from Thermal Power Plants and the entire 8 Mn.t of granulated Slag produced by Steel manufacturing units is being consumed by the Cement industry thereby reducing the carbon footprint. The performance of best plant of the Industry w.r.t. Power & Fuel consumption of 68 kwh/ton of cement & 667 kcal/kg of clinker compares well with best Japanese levels of 68 kwh and 650 kcal.

Cement Price Hike
Cement price hike was the steepest in April 2017. The cement producers are attributing this to the rise in the cost of inputs citing the example of Pet Coke whose price have increased from $40 to $100 per tonne in a year’s time apart from the increase in prices of diesel.

Average cement prices nationwide picked up strongly in April, a 28 April report by Edelweiss Securities Ltd said. “Average all India prices rose 6.7% month-on-month led by Western and Southern markets where price jumped in double digits, followed by Eastern (up 6% month-on-month) and other regions,” the report said.

An Edelweiss survey showed cement offtake was robust in the East, stable in the North, and marginally weak in Uttar Pradesh due to sand shortage.

“With the impact of demonetization gradually subsiding, cement prices have reached the pre-demonetization levels in April 2017 in most markets,” said Sabyasachi Majumdar, senior vice-president and group head at ICRA Ratings.

“Going forward, we expect prices to be supported by a marginal improvement in capacity utilisation. The slowdown in new capacity addition and improvement in the supply-demand scenario in FY18 should support capacity utilization levels and thereby cement prices.”

The cement sector is seeing early signs of increase in demand after a short-lived decline and prices of the commodity are likely to rise.

The GST Council has recommended lower rate of 5 per cent on key inputs like limestone, sand, gypsum and iron ore. This would keep the production cost lower for Cement manufacturers. Due to lower tax on transport sector, the freight cost for Cement companies would be lower in the coming months. The GST rate of 28 per cent is recommended on the sale of Cement. Higher rates of GST for cement is likely to make construction costly. The return on capital employed in cement industry is close to 13 per cent With the new GST rates coming to the fore, the margins are likely to be impacted. Not all cost increase can be passed on to the customer.

Merger and Acquisition
Various deals in the last year signify the ongoing consolidation across the length and breadth of the country. Not only the foreign players but the domestic players are well active in the merger and acquisition of cement assets. JSW Cement has bought ACC Ltd’s complete stake in Shiva Cement. Jaiprakash Associates Ltd has agreed to divest its Cement assets to UltraTech in February last year. Dalmia Bharat Ltd and OCL India have both agreed for the merger. Nuvoco Vistas Corp. Ltd (formerly LafargeHolcim) owned companies Ambuja Cement and ACC are contemplating plans to merge both the entities. The board of both the companies have initiated a study to take this forward. The acquisition of Jaiprakash Associates Ltd cement business by Aditya Birla group’s UltraTech Cement Ltd is on and likely to complete soon. The deal is worth Rs.16,189 crore as per media reports. The deal received National Company Law Tribunal (NCLT)’s approval in March, 2016 and the Competition Commission of India (CCI)’s approval in August 2016. UltraTech’s cement capacity will increase by almost a third to 90.7 million tonne per annum after the deal closure. It would also open up the markets of Uttar Pradesh, Madhya Pradesh, Himachal Pradesh and Andhra Pradesh for UltraTech. In July 2016, Gujarat-based Nirma Ltd acquired Lafarge India’s cement assets for $1.4 billion. In August last year, Kolkata-based Birla Corp. Ltd acquired Anil Ambani-led Reliance Cement at Rs.4,800 crore. The consolidation is happening across the sector and large companies are coming to the fore.

Capacity Utilisation
Most of the PAN India players have still not been fully utilising their capacities. With the kind of projects coming up in the country including in the infrastructure space, the cement companies are likely to show higher capacity utilisation. Industry sources claim that if you end up improving the capacity utilisation by 5%, the bottom line impact on the cement companies working would be close to improvement in the growth of around 15% to 20% depending on case to case as far as the profit growth is concerned. The higher capacity utilisation could result into better profit performance for most of the cement companies.

Industry Update
Wonder Cement plans investment of Rs.2,500 crore to expand its production capacity to 11 MT. The company is setting up two more grinding units at Madhya Pradesh and Haryana having around four million tonne capacity, which will be ready by 2020, along with, adding second line of production at its existing unit at Rajasthan. Emami Cement has commissioned a 2 million TPY cement grinding unit in Burdwan district at a cost of Rs.500 crore. The completion took 13 months. Adani Cementation Ltd plans to set up a 5 MTPA clinker grinding facility at Lakhpat in Gujarat. The project is estimated to cost Rs.1500 crore.

The completion is targeted in 24 months. Aditya Birla Group firm UltraTech Cement has recently commissioned a 0.3 mtpa slag cement manufacturing capacity at its existing facilities at Pataliputra in Bihar. Ultratech Cement Ltd is setting up a 3.5 million tonne per annum (MTPA) integrated cement plant at Dhar in state of Madhya Pradesh. The work has started in April 2017 and likely to complete by August 2018. Dalmia Bharat Group firm OCL is setting up a four million tonne per annum capacity cement plant as part of its expansion plan near Salboni in Odisha state. Shree Cement is coming up with cement plant in Raghunathpur region in West Bengal and second one near Cuttack in Odisha with two million tonne per annum (mtpa) capacity each. The raw materials will be sourced from its limestone block in Chhattisgarh.

The investment would be to the tune of Rs.500 crore in each of these units. As of now, the company has already acquired 120-130 acre of land in West Bengal and land acquisition process is on in Odisha. NTPC Ltd has invited expressions of interest (EoI) from cement manufacturers for setting up cement units near its plants. Power major is also open to setting up cement units as a joint venture. Around 15 companies have evinced interest in the proposal. NTPC aims to utilise 52 million tonnes (mt) of fly ash generated by its projects as well as earn from captive power consumers. JSW Cement is setting up a 2.4 million tonne cement spread over 150 acre at Salboni in West Bengal. As of now, around 90 per cent of the work is completed. The work will be complete within 1-2 months .

Market Scenario
After staying in the slow lane for some time due to Government of India’s demonetization drive, the sector is showing promising signs of growth as per latest media reports and industry coverage. The increased focus of the Government on infrastructure spending, the real estate sector as well is trying hard to make a comeback. Infrastructure development and Real Estate sector are the main demand drivers for the cement commodity in India.

Smart Cities
Government of India’s most ambitious plan to create 100 smart cities promises a windfall for the Cement sector in the coming years.

Affordable Housing
Low cost housing and infrastructure development are likely to arrest the slowdown of the Cement sector. As per media reports quoting K.K. Maheshwari, Managing Director of UltraTech Cement, the demand for cement is likely to grow by 5-6% in the current fiscal.

Pradhan Mantri Awas Yojana - Housing for All (Urban)
The scheme aims to address total housing shortage of about 20 million comprising slum households estimated to be around 18 million and 2 million non-slum urban poor. The mission is implemented during 2015-2022 and provides central assistance to Urban Local Bodies (ULBs) and other implementing agencies through States/UTs for:
  • In-situ Rehabilitation of existing slum dwellers using land as a resource through private participation
  • Credit Linked Subsidy
  • Affordable Housing in Partnership
  • Subsidy for beneficiary-led individual house construction/ enhancement.

The mission is likely to provide growth impetus to the Cement sector in the coming years.

Redevelopment of Railway Stations
Indian Railways plans to carry one of the largest auction of Public Private Partnership (PPP) projects entailing an investment of Rs.30,000 crore. The project comprises redevelopment of 25 most prominent railway stations across the country. The implementation of such project can lead to significant gains for the Cement sector.

Funds starved infrastructure and real estate sector got a booster when Reserve Bank of India announced allowing banks to invest in Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvITs). These would go a long way in restoring the growth of both infrastructure and real estate sector paving way for robust growth of the Cement sector in the process.

Roads & Highways Construction
India boasts one of the largest road networks in the world with about 47 lakh km of roads comprising National Highways (NHs), Expressways, State Highways (SHs), district roads, PWD roads, project roads, etc. The Ministry of Road Transport & Highways constructed 8,200 km of roads against the target of building 15,000-km in FY2016-17. The country could construct 22 km of roads per day in 2016-17 against the 41 km per day target.
In the FY2017 budget, the central government has raised the allocation for the roads sector to Rs.64,900 crore for 2017- 18 against Rs.57,976 crore in 2016-17, with a stress on laying 2,000 km of coastal roads. All this promises a growth for the Cement sector.

Opportunities Galore

Chenab Bridge:

The Chenab Bridge is coming up at a cost of Rs.1,100 crore. The massive arch-shaped structure is a railway steel and concrete arch bridge, under construction between Bakkal and Kauri in the Reasi district of Jammu and Kashmir in India. When finished, the bridge will span the Chenab River at a height of 359 m (1,178 ft) above the river, making it the world’s highest rail bridge. The completion is targeted to open in 2019.

Cement Concrete Road Project, Phase-II Nagpur City: Nagpur Municipal Corporation (NMC) has selected 55 roads of approximately 70.88 K.M. in length of varying widths spread, all over the city under Cement Concrete Road Project, Phase-II. The proposed works includes construction of specific width as Cement road along with improvement of existing and or construction of facilities like Footpath, drainage arrangement, road divider, necessary utility shifting etc. The approximate indicative cost is around Rs.300 Crore. The total work has been divided in 22 no. of packages.

Mumbai-Ahmedabad bullet train project:
National High Speed Rail Corporation (NHSRC) is executing the ambitious Mumbai-Ahmedabad bullet train project. The high speed line covers a length of 508-km. It would be an elevated corridor except for 21- km underground tunnel section, out of which 7-km will be under the sea. General consultant was appointed in December, detailed design will be worked out, ground survey is completed, social impact assessment would be taken up soon and the overall construction is likely to start by end of 2018 and complete by December 2023. The project is estimated to cost Rs.1.10 lakh crore.

Hyderabad airport expansion on the anvil:
GMR Hyderabad International Airport Ltd intends to increase the passenger handling capacity of the Hyderabad airport to 20 million passengers per annum from the current 12 MPPA. The plan for airport expansion would be finalised soon. According to India Ratings & Research, to carry out this expansion, GHIAL would require an approximate outlay of Rs.2,500 crore. The expansion would be financed through debt (70%) and the rest through equity and internal accruals.

AAI plans to build new terminal at Chennai airport: Airports Authority of India plans to build new terminals as part of Chennai Airport phase II expansion. The project is likely to cost more than Rs.2,000 crore. A detailed project report has been submitted and a tender will soon be floated to find a contractor. The completion is targeted by 2020-21.

CSIA all set for a facelift: Chhatrapati Shivaji International Airport (CSIA) is all set for a facelift. MIAL has got environmental clearance for the expansion project estimated to cost Rs.3,500-crore along with the permission to relocate the iconic air traffic control tower to Kalina as a long-term security strategy. The expansion project aims to accommodate 50 million passengers by 2020. The expansion of the airport would require around 20 acre land.
Six acre would be used for building a taxiway from the parking apron of Terminal T2 to the main runway and 9.04 acre for another taxiway expansion to enhance airside safety and efficiency. The remaining 4.9 acre will be required for facilities like radar, aircraft parking, aerobridge, etc.

Haryana signs MOU worth Rs.18000 crore with Singapore companies: The Government of Haryana has signed five MoUs worth Rs.18,000 crore of investment in the state. The five MoUs were signed with Singapore based companies Ascendas Singbridge for setting up Townships and development of Logistics parks, Meinhardt Group, Adonis for Wellness projects, Equis Energy which makes investments in a wide range of transmission and power distribution projects and with YCH Logistics for setting up Logistics projects.

Green Park project in Rajasthan: Real estate developer BDI has acquired the largest affordable housing project under Mukhyamantri Awaas Yojana, Rajasthan. The project, Green Park, is the largest affordable housing project in the state, catering to LIG (Lower Income Group) and EWS groups (Economically Weaker Segment).The project was earlier being developed in a joint venture. The project is spread over an area of 32 acre, and comprises 1 BHK (for EWS category) and 2 BHK (for LIG category) apartments. The LIG flats are 1760 in number, each spread over an area of 350 sq ft. whereas EWS number about 180, each having an area of 550 sq ft.

The project is located in Chikani, Alwar on Alwar-Bhiwadi Expressway, the Green Park project enjoys strategic location being accessible to several international schools and upcoming cargo airport in Kishangarh.

Executive Quotes:

Jordan Cram CEO, Enstoa
We know that India has historically been a labour intensive delivery model. Now, given the speed, complexity and global supply chain of mega projects, this model no longer works. Organizations in India need the same processes, capabilities and tools their peers have leveraged in other markets. Furthermore, organizations in India have a leapfrog opportunity. As a laggard or second-mover in large scale serial infrastructure building, Indian organizations can stand on the shoulders of giants, leveraging lessons learned, and reach even greater heights and possibilities.

Nitin Vyas Managing Director & CEO,
BEUMER India Pvt Ltd

Major thrust in the future for technologies of future manufacturing plants would be ‘Digital Transformation’ of the plants and move towards ‘Industry 4.0’. The speed and impact of this transformation or new age industrial revolution has to be embraced by one and all industries to stay ahead of the curve. As mentioned earlier for the KPI’s, this technology shift globally is already happening with the involvement of Data, Cloud, Analytics and Engagement.

Rakesh Sharma Director,
AMCL Machinery Ltd

Over the last 3-4 years, the market has been sluggish due to subdued demand of the Cement due to lack of activities related to housing and infrastructure projects. We expect the situation will change sometime by end of this year or early next year as it is expected that work on large infrastructure projects and industrial projects will commence in full swing. Housing sector is also getting the boost from the GOI.